How the free market could fix the emissions crisis

The resource-rich Canadian province of Alberta recently joined Ontario and Saskatchewan to oppose Canadian Premier Justin Trudeau’s tax on carbon. These and other international political shifts demonstrate that lawmakers such as Carlos Cubello (R-Fla.) must consider alternative policies rooted in free market economics to reduce greenhouse gas emissions, rather than unpopular and costly mandates such as carbon taxes or renewable energy targets.

In Australia, the center-right Liberal Party rose to power in 2013 after successfully opposing the previous government’s carbon tax. More recently, Australia’s government decided to scrap its taxpayer-funded “Clean Energy Target”. The target was followed by substantial subsidies for wind and solar power designed to create artificial market signals to increase generation. Inadvertently, this led to price hikes for consumers by discouraging investment in carbon-based energy sources (such as coal) which remain necessary to provide base-load power backup to renewables. The premature retirement of coal-fired power stations across Australia followed.

Despite the country’s blessing on vast coal and natural gas reserves, Australians pay some of the world’s highest electricity prices — often double or triple what businesses and individuals in the United States pay. In the state of South Australia for example, the average consumer pays 36 American cents per kWh — above even the average for Danes and Germans. By contrast, the average American pays under 11 cents/kWh.

The decline of coal-fired power, and subsequent over-reliance on intermittent wind and solar, has also been blamed for a series of blackouts which struck South Australia late last year, depriving virtually the entire state — an area well over twice the size of California — of power.

Just last week, these events culminated in Prime Minister Turnbull’s downfall and replacement after a “coup” by politicians in his own party — partly due to resentment over his support of climate change policies.

Elected representatives concerned about climate change must pursue reforms that are cogent with political realities. Politicians must address the problem in a way that makes the public feel they are part of a solution bigger than themselves. This is a welcome alternative to status quo climate change policies around the world that function more as moralizing dictates forced upon people by those who traverse the halls of power.

There is a better way: a voluntary model based on free market principles that don’t distort the energy market or force higher prices on families. Now, innovative research in behavioral economics reveals such a model could actually be more successful in reducing greenhouse gas emissions than any of the compulsory mechanisms tried before.

Picture this. You get your electricity bill. It shows you a figure which includes a tax calculated to offset your carbon footprint through purchasing carbon credits. But you can now opt out and not pay the full price. Those who want to do what they feel is good for the planet are free to pay the full price — or even more for a negative carbon footprint. This could easily be done through either an online interface or a simple form in the mail.

Behavioral economist Dr. Brendan Markey-Towler from the University of Queensland, found that such a model could work well. Humans are less likely to choose an option that isn’t the “default” as it takes more effort to choose an alternative and opt out. This becomes even less likely when the “default” is a social good, meaning it appeals to the inherent human desire to meaningfully give back to one’s own social group.

Studies of the voluntary carbon offsets that already exist in the aviation industry — such as the choice to pay a bit more to minimize your emissions when you purchase a plane ticket — find that a majority of people choose to pay more. When it comes to helping the environment, they’ll even buck trends and decide to pay a higher price through a model in which choosing to offset emissions isn’t the default option.

Compliance is also likely to increase over time due to the human tendency to rationalize repeated behavior patterns, a tendency noted by Dr. Markey-Towler in his 2018 work, An Architecture of The Mind. The positive effect of peer pressure can be enhanced by publicly releasing data which shows offsets being paid for by people within each neighborhood or city. This will organically encourage consumers to get on board with their neighbors.

While some cost may be involved for utility companies to set up this type of system, it’s likely to be low — since they already offer different discounts through a similar system. In any case, the costs are miniscule compared to those government imposes through mandatory carbon taxes or renewable energy targets.

Since consumers would actually feel in control of the greenhouse gas reduction process and would be consciously aware of how their decisions fit into it, this model is more likely to make consumers and voters amenable to climate change policy. The best part? It’s all by choice.

SatyajeetMarar is the director of policy at the Australian Taxpayers’ Alliance, a 75,000+ member taxpayers’ advocacy group, and a contributor to Young Voices, a nonprofit based in Washington, D.C. that works to promote free-market policy. He regularly appears before parliamentary inquiries to provide evidence on tax & trade policy, human rights, consumer choice and foreign policy, and is the author of "Cheap Energy Guarantee," a nine-point solution to Australia’s electricity price crisis.